In March I entered a contest sponsored by American Airlines entitled “Why You Fly” in which entrants were required to create videos, photos, or writing telling a story as to why they fly. My entry won the grand prize in the video category. The prize consisted of twelve flights for two people from any American to city to any worldwide destination that American Airlines services. The flight vouchers would have to be used within one year or forfeited. Upon my notification of the prize, I was very excited, as my wife and I love to travel, and have done so frequently on American Airlines. I had worked hard creating my video entry, and I felt that my work had been justly rewarded.

However, when I received the winner’s package, I noticed some fine print that indicated that I would be issued a 1099 form for the “full retail value” of the prize, and that I would be required to pay all federal, state, and local taxes on that value. This concerned me greatly as American Airlines had indicated that the retail value of this prize was $52,800. I spoke to my tax accountant and a representative of the company, Shamrock Industries, that organized the contest, and confirmed that I would have to pay tax on $52,800 as if it were income that I had received.

I was shocked, to say the least. I did the math, and determined that my tax liability on this prize, between federal, state, and local taxes, would be somewhere between $15,000 and $23,000, depending on my other income for the coming year. I know it’s the law that taxes must be paid on winnings, and this certainly makes sense where winnings are in cash, or are items that can be sold if necessary to cover the taxes. However, in this case, I would not be able to sell the flight vouchers, and even if I was, I can’t imagine anyone who would be willing to pay $2200 for a restricted economy ticket. Yet this is what American Airlines has valued each flight voucher at.

I spoke to the representative from Shamrock Companies, who indicated to me that American came up with this valuation based on a “worst case scenario” price. I explained to him that it was highly unlikely that I would be able to use all, if in fact, any of the vouchers to fly to exotic destinations. Due to the one year time limit, there is no way that I could get the time off for 12 such trips in such a short time, let alone pay the ancillary costs of the trips. Most likely, the majority of the tickets would be used to fly domestic short hops to places such as Miami or Chicago to visit friends. This is where American’s valuations become absurd. On American’s Web site, a ticket to Chicago costs approximately $200 including airport taxes. Yet, if I were to use one of these vouchers to fly to Chicago, I would be required to pay income tax on $2200. This could amount to approximately $1000 out of my pocket in taxes for a ticket worth $200. Not a very good deal, especially when you consider that I would also have to pay airport taxes on top of this.

Shamrock told me that I would be responsible for paying taxes on American’s “full retail value” no matter where I used the vouchers to fly, and even if I only used some - or none - of them. I explained to them that it seemed outrageous to me that, should I accept this prize, I would be required to come up with an amount in the vicinity of $20,000 to pay taxes on money which I never even received. I asked them if, instead of the flight vouchers I could be given a cash reward, or if American Airlines would lower their valuation to a more reasonable amount. American refused to do anything to make this prize actually worthwhile. They do not seem to understand the absurdity of the valuation they have used. The best they could do was to offer me fewer flight vouchers, but each flight would still be at the inflated valuation of $2200. I explained that paying $1000 in tax on one flight is proportionally just as bad as paying that amount for twelve, so in fact they haven’t offered an effective solution, but my appeals have fallen on deaf ears.

My wife and I have been frequent fliers on American Airlines for many years, and thus are outraged that American made no attempt to offer anything of value. I now question the company’s motivation in sponsoring such a competition which seriously misleads winners into thinking they will receive a great prize when the reality is that they receive no net benefit. I have written a letter to American Airlines’ CEO and to their customer relations department, but I suspect that this will do nothing. I have also sent my story to over 20 TV stations and newspapers in the hope that, at the very least, I can generate some deserved negative publicity for American Airlines.

Jack